Nation can expect fiscal fallout from Katrina

Washington  President Bush's fiscal and political policy is a bit like that old Democratic mantra - "tax and tax, spend and spend, elect and elect."

For Bush, though, it's more like "spend and spend, tax cut and tax cut, elect and elect."

That may explain why, in the rush to provide emergency funds to cope with the Katrina disaster, so little discussion involves where the money will come from to cover the $100 billion to $150 billion price tag.

The White House indicates it views Katrina funds as one-time emergency spending, a way to keep them out of the regular budget totals.

But the government will still have to raise the money, presumably by borrowing it. And it will add to the national debt, swelling interest costs already expected to pass $300 billion a year by 2010.

The only other way would be spending cuts or tax increases. So far, we've heard only cursory discussion of the former and none of the latter. But signs of nervousness over the deficit are beginning to appear that could delay extending some recent tax cuts.

In delaying a bill to speed repeal of the estate tax, GOP leaders stressed they were not abandoning it. They expect to bring up the plan, which mainly helps the wealthiest taxpayers, later this year.

But The Wall Street Journal said they may put off another bill to extend other tax cuts, including reducing the rate on capital gains and stock dividends to 15 percent.

These measures would matter less if the long-term fiscal outlook was as promising as when Bush took office. But a combination of factors turned the surplus he inherited into a deficit - the 2001 recession, costs stemming from the Sept. 11 attacks, lost revenue from the tax cuts and the cost of the Iraq war.

Despite the White House's mid-summer optimism that it can reduce the deficit in half by the time Bush leaves office, the GOP-controlled Congressional Budget Office notes that the longer-term outlook hadn't changed much and predicted "significant strains on the budget" over the next decade.

That's because nothing has been done to fix the two biggest threats to solvency:

l Tax issues. When Congress passed the 2001 tax cuts, it limited the long-term budgetary impact with phony expiration dates. It voted to eliminate the estate tax in 2010 and then restore it at the original rates in 2011. Personal tax cuts expire in 2010.

Those provisions make the long-term outlook look far better on paper than in reality, since they assume expiration of the cuts will bring in more revenue.

In fact, the idea of ending the tax cuts was a gimmick, undertaken on the assumption they would be extended. Of course, no one assumed so large a federal deficit. Now, it seems likely that, at the least, critics will try to limit them when that debate occurs.

l Retirement costs. An even bigger problem stems from what CBO calls "the impact of demographic changes on current programs" - the growing Social Security, Medicare and Medicaid costs for an aging population.

This year's budget measures, as drafted, would cut federal spending on Medicaid, chiefly by passing more of the burden to the states. That may yet happen.

But unless some kind of Social Security legislation miraculously rises from the ashes, lawmakers will do nothing about the bigger problems of Medicare and Social Security, where costs could grow geometrically in coming decades.

The three programs now account for 42 percent of federal spending, CBO says. Within a decade, the percentage will hit 50 percent - and continue to grow.

"In the long run, the increasing resources needed for such programs will exert pressure on the budget that is likely to make current fiscal policy unsustainable," CBO says.

That means, unless benefits are cut, taxes will have to be increased.

That was the case before Katrina hit, ensuring slower growth and reduced federal revenues on top of massive reconstruction costs.

A handful of House members, mostly GOP conservatives, cast symbolic votes against the Katrina funds. But no real effort is likely to cut spending because most members think it helps re-elect them.